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Uncertain future for divorce settlements

As the end of the year approaches, spouses facing an impending divorce have historically tended to use the holiday season as one last opportunity to hold their families together. This year, however, things might be very different for divorcing or separated spouses. The reason for this potential difference is that the upcoming new year will usher in a dramatic change in how taxes are assessed on spousal support.

Instead of the spouse who receives alimony being responsible for income tax on the funds, Bloomberg indicates that the Tax Cuts and Jobs Act shifts that responsibility to the spouse who pays alimony. At the same time, the paying spouse also loses the deduction on their income tax return that they would have enjoyed under the current law that has been in effect for multiple decades. 

At first glance, the new law may appear to be favorable to the spouse who might receive alimony since that person would be able to get income and not pay taxes on it. However, the reality could be quite different as the amount of money received may well be less than before. This is because the paying spouse may not want to pay as much as they would have under the existing law since they will now be on the hook for taxes as well. 

The new tax law may also result in changes pertaining to other agreements made during a divorce settlement. Instead of paying spousal support, couples might instead choose to reallocate their division of marital property, for example.




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